Institutions and Infrastructure for Market Development

Background

Smallholder cultivation is the hallmark of agriculture in much of sub-Saharan Africa, Latin America and South Asia, where intensity and density of poverty still remains high. In South Asia, for example, out of 125 million farm holdings, more than 80 per cent have an average size of 0.6 hectare and farmers with less than 2 hectares account for 40% of total food grain production. In sub-Saharan Africa, more than two-thirds of the holdings have an average size of less than one hectare and account for over 90% of agricultural output. In Latin America there is also a huge inequality in the distribution of land. FAO estimated that the largest 7% of land holdings in the region (those above 100 hectares) accounted for 77% of the land, while the smallest 60% had only 4% of the land (Morley, 2001). Most of these smallholders practice either subsistence farming or operate largely in local markets due to lack of connectivity to more lucrative markets at provincial, national or global levels. As a result, incentives remain weak, investments remain low, and so does the level of technology adoption and productivity, resulting into a low level equilibrium poverty trap.

How can these small holders come out of this poverty trap? Two instruments appear critical to break this deadlock for the small holders: one is physical infrastructure such as information technology, roads, ports, etc. that connects smallholders to markets; and the other is the role of accompanying institutions that can reduce the marketing risk and transaction costs in the process of exchange between producers and consumers. Smallholders, due to their small surpluses in production, generally are exposed to higher degree of risk and transaction costs. So any innovative institutions that link ‘farms to markets’, reduce their transaction costs and minimize risk will help them to participate in markets. However, the exact nature of infrastructure and institutions that can enable the small holders transcend from subsistence farming of a village economy to actively participate in provincial, national and international markets, would vary from country to country and even from region to region within a country.

This research program will provide strategic inputs to strengthen the institutional and infrastructure base that is necessary to respond to the heterogeneity among the smallholders and to support enhancement of the competitiveness of smallholders in rural areas in the production and marketing of their products. It also aims at improving the knowledge about the impact that complementary investment in rural institutions and infrastructure, both capital intensive infrastructure (roads, electricity, potable water and drainage, water for irrigation and telecommunications) and post harvest technologies (storage services, processing infrastructure, etc) may have in market development and in reducing poverty. Finally, it will look at the level of market accessibility.